Have we seen this before?

Photo: Doug Tengdin. All rights reserved.

I live at the edge of the White Mountains. I like to get outside hiking or skiing whenever possible. Sometimes, my friends and I will head into steeper terrain where an avalanche is a definite possibility. The first time we went out, we were hyper-vigilant about checking prior avalanche reports, looking at recent incidents, reviewing chat rooms, monitoring the weather – everything possible. After all, when you’re in the backcountry, there’s no one to backstop you. You’re the backstop.

After a few years, though, we were a little less diligent. The more we skied, the more confident we became of our abilities to handle different situations. We’d head up to a mountain, enjoy a day of awesome skiing, and congratulate ourselves for being so good at assessing risk. Lather, rinse, repeat. Pretty soon, we grew more relaxed about incident reports, danger scales, incoming weather. After all, we were pretty familiar with the terrain.

I bet you know where this is going…

No, we didn’t overestimate our abilities and have a big, nasty “risk event.” But we did start down the path of overconfidence. Overconfident skiers can be dangerous – to themselves and to those around them. It doesn’t matter how many times we’ve sent a line, how many successful trips we’ve taken, how many times we’ve seen these sorts of conditions. Every slope is different, every day is different, every time of day is different. Flat light around dawn or dusk is NOTHING like midday light. (I learned that, again, on a recent run – in the dusk, over and unexpected drop. Ouch.)

It’s the same thing with investing.

Someone reads a book about Warren Buffett and decides they want to emulate this legendary investor. They read up on some stocks or ETFs, follow a couple blogs, and put some money to work. The stocks perform well, so they pat themselves on the back and invest a little more. Pretty soon they’re in chat rooms using Robinhood to trade options, or opening up margin accounts. I bet you know where this is going.

Photo: Rob Lee. Source: Flikr. CC BY-ND 2.0

Investing and backcountry skiing are similar. They’re both complicated and imprecise sciences that can draw you in and give you a false sense of security. No matter what precautions you take, there’s always a chance that you’ll get it wrong. All the precautions and planning just improves your odds of getting it right. So how should we manage ourselves, given that markets – and snow conditions – are infinitely variable and unpredictable.

First, make sure that your decisions are reversible. Buying a stock or driving out to the mountains can be easily reversed. Just sell the shares or head back. Yes, we all have an “endowment effect” that comes into play once we’ve made a decision to start. Just give yourself permission to change your mind. But heading *down* a slope is a much more significant choice. We’d better be sure the snow conditions support it. Similarly, some investments come with lock-ups, penalties, and other restrictions. Be sure those are clear before committing any cash.

Second, the stakes matter. Going down the bunny hill on a new pair of skis or board is an easy choice, and falling isn’t that significant. Heading over “The Lip” at Tuckerman’s Ravine on Mount Washington is another matter. One wrong turn and you could tomahawk 1000 feed down into the bowl. (Full disclosure, I’ve never gone over The Lip – yet. But I’ve seen it done, with happy and not-so-happy results.)

Above the Lip at Tuckerman’s. Photo: Chris Pomeroy. Source: Flikr. CC BY-SA 2.0

Finally, be ready for changes. Economics, weather, tax law, financial conditions, snowfall – everything is in the process of going from one state to another. The only thing we can be sure of is an awareness of our own capabilities and resources. Our best resource for getting out and getting back safely and successfully is the knowledge of ourselves: our goals, needs, hopes, and dreams. Fitting our aspirations to match our resources is why we plan, and why I look forward to winter so much!

By all means, don’t be intimidated: get out there and go skiing, and put your money to work for you in the markets. Just be aware that we could be mistaken about the conditions. The more we prepare, the better things should look.